PhotoThe housing crisis has been over for years, but millions of homeowners are still underwater on their mortgages and many of them are struggling to make payments.

The government's previous mortgage modification efforts produced questionable results, but now the Federal Housing Finance Agency (FHFA), the main regulator of Fannie Mae and Freddie Mac, will help some “seriously delinquent” underwater homeowners to avoid foreclosure.

The FHFA has announced it will allow Fannie and Freddie to reduce the amount owed on some mortgages, a move estimated to provide relief to about 33,000 homeowners.

The agency says it is a one-time offer for borrowers who have Fannie or Freddie-backed mortgages and who meet specific eligibility criteria. They must be owner-occupants who were at least 90 days delinquent on their mortgages on March 1.

Additionally, the outstanding balance on the mortgage must be no more than $250,000.

Could help both families and communities

Mike Calhoun, President of the Center for Responsible Lending, said the action has the potential to help both struggling families and hard-hit communities.

“The new program recognizes the value of principal reduction as an important tool that helps to keep families in their homes and reduces the cost of foreclosures,” Calhoun said in a statement emailed to ConsumerAffairs. “Up until now, this effective loan modification tool was not available to homeowners whose mortgages are owned by Fannie Mae and Freddie Mac.”

Early loan modification efforts often left struggling homeowners frustrated by loan servicers' repeated requests for the same documents. In many cases, by the time homeowners had gathered all the requested material, their homes were in foreclosure. Rarely, if ever, did a modification include a reduction in principal on a loan.

Still a problem

FHFA Director Melvin L. Watt expects it to be different this time, noting that while the national housing market appears to have recovered, negative equity remains a real problem.

"The Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes," he said in a release.

While 33,000 homeowners may get relief under the new modification program, it is the tip of a very large iceberg. A recent report by Zillow found more than more than six million homeowners are still underwater on their mortgages, making up 13.1% of homeowners with a mortgage. More than 820,000 homeowners still owe over twice as much on their mortgages as their homes are worth.


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